Increasing consumer surplus through price increases

As I noted last year, the University of Canterbury administration has this year increased the price of an annual parking permit threefold from (roughly) $100 to $300. This raises the price from what was a subsidised rate to something they calculate as being approximately marginal cost. Needless to say, this is something that the Economics department had been advising for a long time, given our propensity to value efficiency even at the expense of our own direct wellbeing. After a few months of experience with the new policy, it has become clear, though, that it is not only efficiency enhancing, but it has also increased consumer surplus even without consideration of what use the university makes of the increased revenue.

How can that be? It is an application of how the deadweight loss triangle in a standard S&D diagram understates the cost of a price floor or ceiling. Previously a parking permit at Canterbury did not confer a right to park; it conferred the right to hunt for a park. Many of us wasted a lot of time searching for a park before giving up and parking on the street several blocks away. The problem was particularly acute on wet days. Some of those who successfully found parks had a low willingness to pay, others who missed out valued the parks much more highly. How do we know this? Well this year, as a result of a trivial price change from next-to-nothing to three times next-to-nothing, the carparks are never full.* Even on the wettest days, one can come in late and always be guaranteed a park. Those cluttering up the parks last year but not this clearly didn’t value the parks highly; this year, it is only those put a high value on parking who get the parks. And how high can that value be. Well we don’t know for sure, but I am sure this story could be replicated here.

So there we have it. The price went up, and so did consumer surplus. Could the same happen in reverse. Well imagine if you were to impose average cost pricing in the retail electricity market despite it being an industry with sharply increasing marginal cost. Everyone would get a lower price for power, but with no guarantee that the lights would come on on demand. Consumer surplus might well go down. And that is without even considering the lost government revenue from publicly owned power companies….

* I find it difficult to comprehend the size of the demand response; think of the Slutzky equation: there is a huge shortage of on-street parking around the university, so there are no close substitutes for on-campus parking; $300/annum is hardly a large fraction of anyone’s expenditure, student or lecturer. Can the income elasticity really be that high?